In re: Doron Ezra Nava Tomer Ezra

Citation: Not availableDocket: CC-14-1563-KuPeTa

Court: United States Bankruptcy Appellate Panel for the Ninth Circuit; September 22, 2015; Us Bankruptcy; United States Bankruptcy Court

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Shoshana Ezra appeals a bankruptcy court judgment that voided two deeds of trust executed by debtors Doron and Nava Tomer-Ezra in her favor, claiming these transfers were fraudulent. She argues that some of the avoidance claims by Chapter 7 trustee David Seror were time-barred, that there was inadequate evidence of the debtors' intent to defraud creditors, and that there was no proof of their insolvency. The appellate panel, led by Bankruptcy Judge Kurtz, finds no merit in Shoshana's intent argument. It also notes that her limitations defense was not adequately raised in the bankruptcy court and thus cannot be considered on appeal. Furthermore, her statute of repose argument was raised improperly in her reply brief, leading the panel to decline to address it as well. Consequently, the appellate court affirms the lower court's judgment.

The facts indicate that Doron and Nava purchased their residence in 1996, involving multiple transactions among family members. Doron quitclaimed his interest to Nava multiple times, with the last transfer occurring in January 2010, just before their joint bankruptcy filing in February 2011, when the title was solely in Nava's name. At the bankruptcy case initiation, four deeds of trust were recorded, two of which were held by Shoshana Ezra, each allegedly securing a $500,000 debt. The other two deeds of trust were held by banks and were not contested in the bankruptcy proceedings.

In January 2012, Seror filed a complaint to avoid the 2004 and 2009 deeds of trust favoring Shoshana, alleging these were fraudulent transfers. He claimed the debtors did not receive reasonably equivalent value for the 2009 deed and that they were insolvent at that time or became insolvent due to the transfer. Seror asserted that both transfers were made to shield the debtors' equity in their residence from creditors amid pending litigation. He sought to categorize the 2009 deed as an actual and constructive fraudulent transfer under various legal provisions, including Cal. Civ. Code sections 548(a)(1)(A) and 544(b). For the 2004 deed, he claimed it was an actual fraudulent transfer under Cal. Civ. Code 544(b).

Shoshana moved for summary judgment to dismiss Seror's lawsuit, primarily arguing that his claims regarding the 2004 deed were time-barred under California’s seven-year statute of repose (Cal. Civ. Code 3439.09(c)). She contended that more than seven years elapsed between the recording of the 2004 deed and Seror's filing. The bankruptcy court denied her motion, ruling that the statute of repose had not lapsed because the debtors filed for bankruptcy within seven years of the transfer.

Shoshana did not raise any factual or legal issues regarding the statute of repose in her pretrial stipulation or trial documents, nor did she address the statute of limitations defense outlined in Cal. Civ. Code 3439.09(a), which requires action to be taken within four years of the transfer or within one year after discovery of the transfer.

Shoshana asserted an affirmative defense against Seror's complaint, claiming the allegations were barred by the statute of limitations. During the trial, the bankruptcy court found Doron's testimony regarding loans from his parents to be incredible, determining that he inconsistently described whether expenditures were gifts or loans. The court noted that Doron's vague statements about bank accounts suggested they were effectively his, as he used his parents' accounts for personal transactions without demonstrating the source of the funds. Additionally, the court disbelieved Doron's claims about his father maintaining ledgers and the loss of promissory notes, reasoning that his extensive experience in real estate made it implausible he would mismanage such critical documentation. The court concluded that the debtors intended to hinder, delay, or defraud creditors by keeping valuable assets in other family members' names while retaining control and encumbering any equity in their residence. This behavior was inferred to be motivated by Doron's concerns about litigation related to his business and subsequent legal pressures.

The bankruptcy court determined that the debtors received less than reasonably equivalent value for both the 2004 and 2009 deeds of trust. Specifically, regarding the 2009 deed, the court found the debtors were either insolvent at the time of the transaction or became insolvent due to it, had insufficient assets for their business, and intended to incur debts beyond their ability to pay. Conversely, the court found no such issues related to the 2004 deed. Consequently, the court ruled the 2004 deed was an actual fraudulent transfer under 11 U.S.C. § 544(b) and Cal. Civ. Code § 3439.04(a)(1), while the 2009 deed was deemed both an actual and constructive fraudulent transfer under 11 U.S.C. §§ 544(b) and 548, as well as Cal. Civ. Code §§ 3439.04(a)(1) and 3439.05. Judgment was entered to recover both transfers for the estate’s benefit under 11 U.S.C. § 550(a). Following this, Shoshana filed a timely appeal. The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and 157(b)(2)(H), and the appellate court has jurisdiction under 28 U.S.C. § 158. 

The key issue on appeal is whether the bankruptcy court correctly ruled that both deeds were fraudulent transfers. Appeals in such cases involve a review of factual findings under the clearly erroneous standard and legal conclusions de novo. The bankruptcy court's factual findings are considered clearly erroneous only if they lack support in the record. The appellate court noted that upholding the actual fraudulent transfer determination would negate the need to address the constructive fraudulent transfer finding related only to the 2009 deed. The bankruptcy trustee’s ability to avoid property transfers is based on state law, specifically California’s Uniform Fraudulent Transfer Act, which permits avoidance of any property transfer that an unsecured creditor could challenge. Legal interpretations of the Act are guided by how the California Supreme Court would likely rule on the matter.

A transfer is deemed fraudulent under Cal. Civ. Code 3439.04(a)(1) if made by a debtor with the actual intent to hinder, delay, or defraud a creditor, irrespective of when the creditor’s claim arose. Bankruptcy courts assess the debtor's state of mind, determining intent primarily through surrounding circumstances, as direct evidence is often scarce. The Act outlines eleven non-exclusive "badges of fraud," including factors such as the involvement of insiders, retention of control post-transfer, concealment of the transfer, pre-existing lawsuits, transfer of significant assets, and the debtor's insolvency status. While these factors provide guidance, they are not rigidly determinative; the trier of fact must evaluate all relevant circumstances collectively.

On appeal, Shoshana contends that the bankruptcy court's findings regarding intent were erroneous, arguing that insufficient consideration alone does not indicate intent to defraud. She highlights a lack of evidence supporting insolvency or pending lawsuits in 2004, and notes no indications of asset concealment or that the 2004 deed of trust involved a transfer of substantially all the debtors' assets. Additionally, there was no evidence suggesting the debtors were in the process of absconding at that time.

Shoshana's argument regarding intent fails to address the bankruptcy court's findings that the debtors, especially Doron, engaged in a consistent pattern of asset shielding from creditors. The court concluded that their transfers, including the 2004 deed of trust, were aimed at protecting equity in their residence from creditor claims. Despite the lack of evidence for imminent litigation at the time of the 2004 deed, the court inferred that Doron understood the inherent litigation risks associated with his real estate business, motivating the transfer.

Shoshana did not present compelling reasons to challenge the bankruptcy court's findings regarding the 2004 deed, which were deemed not clearly erroneous. Her argument concerning the 2009 deed of trust was even less substantial, consisting of a single paragraph asserting no bad faith due to a mistaken belief about the status of the 2004 deed. However, the court noted that by 2009, the debtors' financial condition had worsened, increasing litigation threats, reinforcing the conclusion that the 2009 deed was also executed to shield assets from creditors.

Additionally, Shoshana raised a new argument about the timeliness of Seror's claim regarding the 2004 deed under California Civil Code, which she had not previously contested during the trial or in pretrial discussions. This lack of earlier defense weakened her position on the statute of limitations.

Federal appellate courts typically do not address issues not raised in trial courts, as established in cases like O’Rourke v. Seaboard Sur. Co. and Moldo v. Matsco, Inc. An issue must be raised adequately to allow the trial court to rule on it, as noted in In re E.R. Fegert, Inc. However, there are exceptions where an appellate court may consider an issue raised for the first time on appeal: (1) exceptional circumstances prevented its earlier presentation, (2) a change in law introduced the issue during the appeal, or (3) the issue is purely legal and does not prejudice the opposing party.

In the case discussed, Shoshana failed to establish any exceptional circumstances for not raising the statute of limitations under Cal. Civ. Code. 3439.09(a) in bankruptcy court. There was no change in law, nor was the issue purely legal; it involved the question of when a fraudulent transfer could reasonably have been discovered. Shoshana argued that the transfer should have been discovered within one year of the 2004 deed recordation, but the court disagreed, stating that the one-year period does not begin until the plaintiff has reason to suspect the fraudulent nature of the transfer.

The California Supreme Court has not yet interpreted the discovery provision in Cal. Civ. Code. 3439.09(a), and there are no published appellate decisions on this matter. While an unpublished case, Hu v. Wang, suggested that the discovery rule pertains to the fraudulent nature of the transfer rather than just the transfer itself, the court chose not to rely on it due to its unpublished status, which limits its citation in California courts.

California courts have not yet interpreted the discovery provision in Cal. Civ. Code § 3439.09(a), but insights can be drawn from other jurisdictions that have addressed similar language in the Uniform Fraudulent Transfer Act. Some courts adopt a strict interpretation, focusing solely on the discovery of the transfer itself, while others advocate for a broader, contextual approach that emphasizes the need to discover the fraudulent nature of the transfer. The reasoning from cases like *Schmidt* and *Freitag*, which support a liberal construction of the discovery rule, aligns with the purpose of the Act—to protect victims of fraudulent transfers.

The discovery provisions in Hawaii and Washington mirror California's, and there is no significant difference in the objectives of the Uniform Fraudulent Transfer Act across these states. A liberal interpretation of Cal. Civ. Code § 3439.09(a) is consistent with California's historical case law on fraud discovery, which indicates that a creditor's cause of action arises only upon discovery of the fraudulent nature of a conveyance.

Consequently, it is predicted that the California Supreme Court will rule that the one-year discovery period does not begin until a plaintiff has reason to discover the fraudulent nature of a transfer. This implies that the determination of when the fraudulent nature of a specific deed of trust was discovered is a factual issue, and thus, legal questions raised for the first time on appeal will not be addressed.

Shoshana argued in bankruptcy court that the statute of repose under Cal. Civ. Code § 3439.09(c) barred Seror from pursuing a claim. However, the statute of repose and the statute of limitations under Cal. Civ. Code § 3439.09(a) are distinct issues, as established in Rund v. Bank of Am. Corp. Shoshana failed to address the statute of repose in her opening appeal brief, raising it only in her reply brief, which is a valid reason for the court to not consider it. Even if considered, the court indicated that the seven-year statute of repose does not preclude a claim under § 544(b) and Cal. Civ. Code § 3439.04 if the claim arose within seven years prior to the debtor’s bankruptcy filing. Since the debtor’s bankruptcy case was filed in February 2011, within seven years of the April 2004 deed of trust, the statute of repose did not bar Seror’s claim related to that deed. Consequently, the court affirmed the bankruptcy court's judgment to avoid the 2004 and 2009 deeds of trust and recover those transfers for the estate's benefit.